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Hayek and Thatcher

    In this blog post, Head of Economic Research Ryan Bourne documents the influence of the Nobel-prize winning economist Friedrich Hayek on Margaret Thatcher and her administrations. This follows the publication of an archive of documents on Margaret Thatcher’s relationship with Hayek and Milton Friedman by the Thatcher Foundation today. This evening the CPS is holding a book launch for Nicholas Wapshott’s Keynes-Hayek: The Clash That Defined Modern Economics.

    Former Conservative Prime Minister Margaret Thatcher once wrote that “the most powerful critique of socialist planning and the socialist state which I read at this time [the late 1940s], and to which I have returned so often since [is] F.A. Hayek's The Road to Serfdom." When, in 1984, Hayek himself sent Lady Thatcher a leather-bound edition, Thatcher’s reply showed how much the gift meant to her. A hand-written ‘It means so much to me!’ appeared under the sort of pleasantries one would usually expect following such a gift.

    Hayek’s critique of socialism, in particular the way in which the ideology undermines individual liberty, was always a cornerstone of the intellectual underpinning of the Thatcher governments’ outlook. Whilst it would be easy to overstate how important his influence was on purely economic matters, what’s striking about the documents published by the Thatcher Foundation today is the respect that Lady Thatcher and Keith Joseph had for Hayek’s opinions on policy matters, and how ready Hayek was to interject on British public policy matters through letters to The Times newspaper.

    In fact, when Keith Joseph was drafting ideas for names for this very institution, one of its proposed names was the Hayek Foundation. This is all the more surprising given that it was only five months later that Keith Joseph actually read Hayek’s The Constitution of Liberty. The effect on Joseph of Hayek’s work was clearly profound enough, however, for Joseph to write to James Callaghan in 1976 to suggest Hayek be considered for a life peerage, and for Joseph to actively help Hayek in attempts to obtain BBC television coverage.

    Whilst Hayek himself was never overtly party political (unsurprising, given that he had previously authored ‘why I am not a conservative’), he was unafraid to undertake public debate. In the letters that he wrote to the Times newspaper prior to Thatcher’s election, he criticised those who sought political power for its own sake, both within the Liberal party (slamming any party that might prop a socialist Labour party in coalition) and within the Conservative party itself (arguing that it was policy change, not merely the election of a Tory government that was necessary to revive Britain). In particular, he saw trade union power as the primary reason for the UK’s economic difficulties, stating:

    “There can indeed be little doubt to a detached observer that the privileges then granted to the trade unions have become the chief source of Britain's economic decline.”

    In fact, the need to curb the trade unions was something which Hayek pursued after Thatcher’s election in 1979 – which, incidentally, he described as ‘the best present on my eightieth birthday anyone could have given me’.  In August 1979 he wrote to Thatcher suggesting that the matter was so urgent that it required a referendum. Correspondence with Thatcher suggests that he saw trade union reform as being even more important than getting to grips with inflation, and in an article for the Times he was quoted as growing frustrated with the pace of change. He was clear who was to blame – not Thatcher, but the ‘wets’ within her own party:

    “what are officially called the wets, and what I call the descendants of the muddle of the middle, are the obstacle to her doing what she would like to do”.

    On economic policy, Hayek was more doubtful on the direction of travel. He pressed Thatcher to move faster in cutting public expenditure, urging her to balance the budget in one year rather than five – and to follow more closely the example of Chile. But it was on monetary policy where he was more at odds, lamenting the influence of Milton Friedman’s monetarist school on government thinking. Hayek instead argued that interest rates should be hiked further to kill off inflation immediately, and the resultant bankruptcies and job losses accepted as the price for faster adjustment. In polite correspondence between the two, Thatcher was at pains to point out that the social impact of even faster adjustment might not have been viable, and that the nature of the UK as a democracy meant that Chile’s example was not directly transferable.

    Despite his disagreement on these issues the correspondence and willingness to meet one-on-one suggests a good relationship between the two, and Hayek was willing to come out to bat for Thatcher against attacks from Keynesians. In a strong letter written for The Times in 1982 he stated:

    “It is Mrs Thatcher’s great merit that she has broken the Keynesian immorality of ‘in the long run we are all dead’ and to have concentrated on the long run future of the country irrespective of possible effects on the electors…Mrs Thatcher’s courage makes her put the long run future of the country first.”

    What then are we to conclude about the influence of Hayek on the Conservative party at the time?

    It’s clear that Hayek’s primary influence occurred through intellectual critique of socialism that he did so much to espouse. This clearly had a big effect on Thatcher, Keith Joseph and other future Cabinet ministers like Norman Tebbit, and underpins many of the small l “liberal” policies adopted through the 1980s, including significant trade union reforms. On economic policy, Hayek provided armoury on the attack against Keynesian advances, but Thatcher’s government never embraced a Hayekian outlook on macroeconomics, with policies more closely resembling the Friedmanite monetarist approach.

    The archived documents released on the Thatcher Foundation website today can be found here.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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    Anonymous - About 1919 days ago

    Use for paper

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